Debt Arrangement Scheme Failure Rate Increases

13th November 2013

Introduction

In December 2012 we published our quantification of the number of Debt Arrangement Schemes which are likely to be completed by the individuals and couples that began them. You can read the 2012 article and research here.

Using Accountant in Bankruptcy data we discovered that the annual attrition rate (as measured by formal revocations of DPPs) was running at 10.39% per annum at that time. While this was a comparatively low figure we were able to illustrate that, compounded over time, this level of attrition means that there was a less than 50% chance of an average-term DAS completing successfully.

Given that the Debt Arrangement Scheme has been heavily promoted to the public in recent times, by the Scottish Government, we wanted to investigate whether these attrition rates have changed over the past year. The outcome is made more significant by the fact that legislative changes have been put in place to drive more people that may have entered different debt solutions in the past towards DAS.

Dataset

The following table has been produced using AIB published data. Some caveats apply to some of the older data which you can review on the 2012 article (linked to above).

* Subject to future validation by AIB.

By drawing together the data for approvals, completions and revocations it’s possible to accurately estimate the total number of Debt Payment Plans (DPPs) under DAS that currently exist.

According to the published data this total should now be around 12,417.

Attrition Rates

The data above suggests that there were 11,712 DPPs in place in total at the end of the first quarter of 2013/14.

438 DPPs were revoked in the 1st Quarter of 2013/14, with a further 347 being revoked in the 2nd Quarter. We are assuming that none of the Quarter 2 revocations relate to the 1170 DPPs approved during the same quarter. For example, it seems highly unlikely that a DPP which was approved on August 15th 2013 would have been revoked by September 30th 2013.

Annualising the 438 revocations for Quarter 1 and the 347 revocations of Quarter 2 we might expect that around 1570 DPPs will be revoked during the AIB’s 2013/14 year.

Using these figures we can therefore estimate that 1570 DPPs out of the 11712 that existed at the end of Quarter 1 might fail over the course of a year.

This equates to an annual failure rate of 13.41%. This figure has increased substantially from 10.39% measured using the same methodology last year.

The Cumulative Effect of a 13.41% Failure Rate

We can extrapolate a 13.41% failure rate to find out how many Debt Arrangement Schemes are likely to be completed.

For example, of the 12,417 active DPPs that existed at the end of the 2nd quarter of 2013/14 how many are likely to reach completion?

The answer of course depends upon how long they are expected to run for. The longer the anticipated term of a DAS the fewer that are likely to be completed:

Using the 13.41% attrition rate previously mentioned we can see that:

Around 65% of three year DPPs will likely be completed.

An average 6 years 8 months DPP is likely to be completed by only around 40% of those that started them.

More than three quarters of 10 year debt arrangements schemes are likely to fail prior to completion.

Comparison to 2012 Figures

It’s clear that as the Debt Arrangement Scheme matures and is used more widely the level of case failure is increasing rapidly.

In the 2012/13 AIB annual report it is stated that there has been, “… an increase in volume (of revocations) in line with increased participation in the Debt Arrangement Scheme”. This may have been correct at the time of writing, but the total number of revocations during the first half of the 2013/14 indicates that the proportion of cases subject to revocation is currently surging upwards.

The full scale of attrition may not currently be evident either. Very large numbers of applications for revocations are currently being rejected by the AIB (792 during the 2012/13 year). The reasons for AIB rejection are unclear, but this might well be evidence that hundreds of DAS cases are not progressing well and are currently at serious risk of failure.

Using our 2012 attrition rate estimates we calculated that:

72% of 3 year DPPs were likely to complete successfully. This figure has now fallen to 65%.

58% of 5 year DPPs were likely to complete successfully. This figure has now fallen to 49%.

33% of 10 year DPPs were likely to complete successfully. This figure has now fallen to 24%.

Conclusions

A 13.41% attrition rate is not especially high. This would compare well with most debt management plan providers that offer informal debt repayment plans.

The attrition rate is however moving rapidly in the wrong direction with some evidence that hundreds of other cases are vulnerable to failure in the near future. The general attrition rate that we’re calculating has increased by 29% in the past fifteen months.

Because DPPs are on average comparatively long the compounded effect of an annual attrition rate of this order is very significant. An average expected term for a DPP was previously six years and eight months. It appears that less than 40% of DPPs of this average expected term will be completed based upon current attrition rates.

Assuming, as the Scottish Government does, that a repayment scheme such as the Debt Arrangement Scheme will produce much better returns for creditors than insolvency may well turn out to be mistaken.

As the Scottish Government applies greater restrictive pressure on protected trust deed fees in the future it’s likely that creditor returns from these arrangements will improve significantly. It may become possible in future years to start to draw comparisons between creditor expectations from trust deeds (based upon dividends) versus DAS (based upon the likelihood that the debts will ever be fully repaid).